A number of key figures from the alternative finance sector have issued “business as usual” statements this morning, as well you might expect them to. But the enormity of today’s Leave vote cannot be understated. At least one chief executive, Angus Dent of ArchOver, was bold enough to call it a “disaster” for the country. Conversely, Rhydian Lewis of RateSetter in fact sees opportunity in the post Brexit landscape.
The overwhelming sentiment across P2P lending and crowdfunding markets prior to last night’s vote was that Britain was better off remaining a member of the EU. That ship has now sailed. When the dust settles, what will be the big question marks for the UK's alternative finance sector?
There’s turmoil in the markets, but will the performance of marketplace loans reflect that? One would imagine not. Marketplace lending companies have long lauded the uncorrelated nature of the returns that they offer to investors. The coming months will put such claims to the test. Many have voiced concerns over the capacity of marketplace lenders to weather a downturn in the economy. We may be about to find out just how resilient they are.
Jaidev Janardana, CEO of Zopa, weighed in: “Zopa focuses on lending to customers with stable income and very high propensity to repay. This is reflected in our credit risk performance through the past 11 years, and in particular through the 2008 downturn. Our underwriting and pricing policies aim for a positive lender return through similar economic turbulence.”
We’ll be able to keep close tabs on the performance of the marketplace lending asset class within the UK, thanks to the Liberum AltFi Returns Index and the recently launched AltFi Data Analytics product, and, it must be said, the high level of disclosure provided by the major platforms. Using the AltFi Data tools, which are powered by loan-by-loan, cash-flow level data from Funding Circle, Zopa, RateSetter and MarketInvoice, users can hone in on lending volumes, aggregate gross lending rates, arrears, bad debts, net returns and term. They can also perform analysis by cohort, by security and by risk band.
Bottom line? If loan performance within the UK’s marketplace lending space wobbles, we’ll know about it.
Exactly what the impact of Brexit will be on performance within the equity crowdfunding space is, frankly, anyone’s guess. We simply don’t have the ability to track investor returns/losses in a timely and accurate fashion for this segment of the market.
If there’s one class of alternative finance provider that you’d expect to be affected by Brexit, it’s the real estate platforms. But remember that there are many different types of platforms within the real estate sector. There’s a whole range of property backed lenders, spanning development loans, bridging loans and buy-to-let mortgages. Landbay CEO John Goodall – who in fact penned an article for us on this very subject yesterday – says that buy-to-let investors are “uniquely insulated” from market turbulence. He explained: “Buy-to-let mortgages were one of the best performing types of loans throughout the credit crisis, and we believe demand for rental property will continue to outstrip supply, while average rents will continue to increase above the rate of inflation. We will no doubt see significant change over the coming months, but agile peer-to-peer platforms are in prime position to capitalise on this opportunity.”
Potentially more exposed are the real estate equity crowdfunding platforms. We recently caught up with Property Partner CEO Daniel Gandesha for an in-depth interview about the platform, in which he said the following: “If you are not positive on the story for UK residential, then that should absolutely factor into your thinking”. Mark Weedon, Head of Research at Property Partner, said today that the “stickiness” of residential property may prevent house prices from falling in the short term, with the exception of London’s most expensive areas. Weedon points out that people are generally unwilling to sell residential property in uncertain times – highlighting this as a unique feature of the asset class. He went on to say:
“During periods of volatility like this, investors tend to prefer assets which can provide a reliable income, combined with lower risk to preserve their wealth. Now more than ever, investments that bring in a reliable income will be highly prized. The net yields on our platform, for example, are up to ten times the Bank of England Base Rate. And of course, Brexit could lead to rates being cut.”
“At Property Partner we’ve avoided Prime Central London, simply because the numbers don’t add up. We target areas, like Woolwich or West Drayton, set for long-term outperformance, often driven by regeneration schemes or infrastructure investment like Crossrail.”
Niall Bohan, Head of Unit in the Capital Markets Union at the European Commission, delivered a keynote speech at the AltFi Europe Summit 2016 in March (which may be viewed below). The key takeaway from that speech was that the Commission was busily sizing up its approach to applying pan-European legislation to “crowdfunding” markets – both debt and equity-based. At the time, this was highly relevant information for UK-based platforms. Now, we’re not so sure. There are EU directives which cover consumer credit and payment services. The FCA has stated that these will remain in force for the time being.
The UK was the first country in the world to develop bespoke regulatory frameworks for the peer-to-peer lending and equity crowdfunding sectors. The approach of the FCA is now being looked at around the world, but few international markets have yet managed to emulate the regime. More often than not, alternative finance platforms are instead shoe-horned into existing regulatory frameworks, which can often prove damaging down the line. Samir Desai, CEO of Funding Circle – which operates on both sides of the Atlantic, once said: "The regulatory regime established in the UK by the FCA for marketplace lending platforms is the only one in the world which has been designed specifically for our business model. I believe this and the best practices adopted by P2PFA members, puts the UK market in a strong position for the future.” Abundance CEO Bruce Davis is on record as saying: “When the US regulator decided to force fit the idea of P2P lending into the existing regulatory framework it created a number of simmering tensions and pressures on those businesses and the way they operate.”
Prevailing sentiment appears to be that the regulator got things right in the UK, but until now there’s been a lingering question mark over what might be the effect of European legislation at the UK level. Can we now cross that question mark out?
In uncertain times, the purse strings tighten. 2016 has so far been anything short of certain. In marketplace lending specifically, events in the US have conspired to throw the sector into a state of near turmoil. Institutional investor demand for marketplace loans has been falling off a cliff, share prices have tanked, and former Lending Club CEO Renaud Laplanche was ousted in early May after details of a mis-selling scandal emerged.
The more salient insights on the state of the online lending industry would suggest that there is nothing fundamentally wrong with the business model, but instead that recent events have led to a great deal of uncertainty amongst investors. Equity investors are every bit as uncertain. 2015 was the year of the monster fundraise. Funding Circle closed a $150m Series E round in April. Prosper pulled in $165m that same month, in a round led by Credit Suisse NEXT Investors. SoFi raised a whopping $1bn from SoftBank Group Corp.
2016, on the other hand, has been decidedly quiet on the fundraising front. In all likelihood, investors are waiting for the market to settle. Today’s Leave vote may well extend that wait.
The UK’s largest alternative finance platforms have to date taken varying approaches to international expansion. Funding Circle is a “global” SME lending marketplace, with operations spread across the UK, US, Germany, Spain and the Netherlands. The company acquired Zencap for €24.428m (in Funding Circle shares) in October last year, thus securing entry into Europe. Though it may seem like a natural pathway for international expansion, not one of the other “big five” peer-to-peer lenders have yet made the leap into continental Europe. The word is that is that it will take Britain at least 2 years to negotiate its exit from the European Union. It wouldn’t be at all surprising if the intervening period of uncertainty causes platforms to hold off on any European expansion plans.
A number of the UK’s equity crowdfunders – such as Crowdcube and Seedrs – also operate across a number of European countries. Quite what the effect of the Leave vote will be for these platforms is unclear, but Seedrs CEO Jeff Lynn is confident that the platform can continue to grow as planned: “We built Seedrs from day one to be a global, cross-border business and all that Brexit fundamentally does is add one more set of borders to the mix."